Study of Army Hospitals Shows Increased but Not Unwise End-of-Year Spending

An award-winning study of spending patterns at U.S. Army hospitals by a University of Iowa accounting professor confirms suspicions that managers spend down their budgets at the end of the fiscal year to avoid a surplus, but also finds that the spending is not wasteful.

The study, co-authored by Ramji Balakrishnan, accounting professor in the Tippie College of Business, looked at spending patterns at 31 Army hospitals from 1998 to 2002, including Walter Reed Army Hospital. It found spending spiked considerably in August and September, the last two months of the federal fiscal year, as managers spent down their budgets so they would not be left with a surplus.

However, the researchers found that the money was being spent mostly on pharmaceuticals and health care equipment, things the managers would have to buy eventually, anyway. In fact, the spending pattern showed a significant dip in October and November, as the hospitals used the supplies they stocked up in August and September. Or, as Balakrishnan puts it, "They eat off what they've stored."

The researchers found that the departments in the hospitals they studied spent an average of $5.3 million in October, the first month of the fiscal year, and $5.6 million in November. Spending then leveled off at between $6.1 million and $6.9 million a month until September, when it jumped up to $7.7 million.

"A 'saving-dissaving' model appears to be at work, where managers simply shift expenses from the start of the next fiscal year to the end of the current fiscal year," said Balakrishnan. "The study also showed the managers were not burning through money on things like furniture or computers. They're not hiding their expenses, so it suggests they were good managers within the constraints of their system."

Balakrishnan's paper, "Spending Patterns with Lapsing Budgets: Evidence from U.S. Army Hospitals," was co-authored by Naomi S. Soderstrom of the University of Colorado and Timothy D. West of the University of Arkansas. The paper has received the Best Paper Award for 2009 from the Journal of Management Accounting Research, which honors the best paper published by the JMAR from 2006 to 2008.

Balakrishnan also won the award in 2002. He and his co-authors will be honored at a conference in January.

Balakrishnan said he plans to use the data from the Army hospital study to determine what impact, if any, the current erratic spending patterns have on efficiency and if a flattened out pattern might be more effective. He said the current study doesn't show whether those patterns have any negative impact on the hospital's bottom line.